Why Japanese Candlestick Charts Are So Important To Your Trading Arsenal!

Outside of Asia, candlestick charts are still relatively unknown, except among some very knowledgeable traders. And the knowledge that is available about these 130 year old trading tools can be attributed to Steve Nison. In the middle of the Eighties, Nison was working as a broker. One day he happened to catch a glimpse of some unusual charts hanging in the office of another trader, one who happened to be Japanese. Later, he learned these were candlestick charts and made it his personal mission to find out everything there was to know about them.

Unfortunately, nothing was known about them in the West at the time. Instead, he had a colleague purchase books for him directly from Japan during a visit. Then the books were all translated so Nison could read them. In about a year, he was able to start using candlestick charts to make trades and he saw the returns go up. In 1989, he published the first article on these ancient charts ever in the United States. And from then on, he became the Western expert on this Japanese art form.

An Explanation of the Candlestick Chart

These charts are an excellent tool for Forex trading. A candlestick chart is basically a visual interpretation of currency activity. Because the chart is easy to interpret (once you understand all of the symbols), it can provide easy-to-follow guidance on when to buy and sell currency. The name of the chart comes from the shape of the designs drawn on the chart.

The design consists of two parts: the body and the shadows. The shadows represent the closing and opening price of the currency on a given day. If the currency closed at a higher price than it opened with, the body is left hollow or blank. If the currency closed at a lower price than it opened with, the body is colored in. When you have hollow candles, this indicates a stronger pressure to buy because the currencys value seems to be increasing. When the candle is colored in, you will have a stronger need to sell your currency because the value seems to be taking a downturn. Longer candles increase the pressure because they illustrate a more active change in currency value than short candles.

Some Candlestick Chart Formations

One of the important formations to look for on the chart is called the doji. You will see these whenever the currency opens and closes at almost the same value. The result is a very short candle. On their own, doji are not significant but you look for patterns of these symbols on the chart. These patterns can help you get a better idea of what is going on in the market and how it should affect your trading decisions.

The hammer and the hanging man are similar to the doji. They are also important symbols on the chart. The hammer shows things are turning around after a slump in the value. The hanging man, on the other hand, suggests selling might be a better option.

This is a fascinating subject which you would do well to study to vastly improve your ability to read the markets! Happy trading!

Disclaimer: Trading forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

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